Why EUR Stays Calm Despite France’s 5.3% Deficit Budget Approval?

Synopsis: France’s Senate approved a 2026 budget with a 5.3% deficit despite government warnings, yet EUR/USD remains stable around 1.173–1.175, showing minimal market concern. Let’s dive into the specifics.

The French Senate made a decisive move on December 15, 2025, approving a contentious 2026 budget bill. However, government ministers immediately criticized the decision, warning it could push the fiscal deficit to 5.3% of GDP. This development has set the stage for intense negotiations between both houses of parliament, with a final vote expected around December 23.

The EUR USD currency pair has shown surprisingly little reaction to this political drama. As of December 19, the pair trades in a narrow range around 1.171–1.173, reflecting minimal market concern. Investors appear to be treating this as part of France’s ongoing parliamentary negotiations rather than a crisis requiring immediate response.

Political Divisions

The conservative-dominated Senate voted 187 to 109 in favor of the amended budget bill. This vote followed France’s deeply divided National Assembly’s failure to pass the legislation last month. The lower house rejected the tax provisions, exposing the challenges facing Prime Minister Sebastien Lecornu’s minority government.

Finance Minister Roland Lescure expressed strong concerns about the Senate’s version after the vote. He stated that the amended budget would result in a 5.3% deficit of GDP in 2026. This figure exceeds the government’s target of keeping the deficit below 5%, which itself would represent only a modest improvement from this year’s estimated 5.4%.

“A deficit of 5.3% won’t work; you are going to have to make concessions,” Lescure warned senators. He emphasized that all parties must make an effort to reach a compromise that reduces the deficit. Furthermore, the minister expressed confidence that lawmakers would be able to find common ground in the coming days.

A joint committee comprising seven lawmakers from both houses will meet on Friday. Their task involves hammering out a new version of the bill for the lower house to vote on. The December 23 vote could provide final approval for the budget, bringing an end to months of political uncertainty.

Currency Markets

Despite fiscal concerns, the EUR/USD has demonstrated remarkable stability. The pair opened around 1.1744–1.1748 and experienced only a modest decline of 0.01–0.06%. The intraday high reached 1.1759, while the low touched 1.1747, indicating extremely low volatility with a range of less than 15 pips.

French 10-year bond yields actually eased slightly to around 3.56%, down 0.02 points on December 15. This suggests no immediate investor flight or widening spreads that typically pressure the euro during fiscal stress.

Markets appear to view this situation as predictable parliamentary maneuvering in France’s minority government setup. Ongoing negotiations and the expectation of eventual compromise have tempered immediate concerns. Moreover, traders seem confident that a full budget failure or government collapse will be avoided.

Broader Factors

Several contextual factors are influencing the EUR USD beyond the French budget drama. The US dollar has maintained steadiness amid growing policy divergence between the Federal Reserve and the European Central Bank. Commentary highlights that the ECB is expected to hold rates steady into 2027, which caps euro upside potential.

Upcoming French and Eurozone PMI releases for manufacturing, services, and composite sectors have captured trader attention. Prior readings have shown mixed recovery signals, making these data points crucial for determining the near-term direction. Therefore, investors are focusing more on economic fundamentals than political noise.

Persistent French fiscal slippage remains a medium-term drag on the euro. Earlier in 2025, political turmoil contributed to EUR USD dipping below 1.166 in October. However, European Central Bank backstops, such as the Transmission Protection Instrument, limit contagion risks and prevent severe market disruptions.

What Lies Ahead for EUR USD

The currency pair’s minimal reaction suggests investors are awaiting clearer outcomes before making significant moves. If negotiations falter significantly in the coming days, volatility is likely to increase considerably. Nevertheless, as of December 16, the impact remains negligible despite the political headlines.

Should lawmakers fail to agree on a compromise version, the government will likely submit emergency stopgap legislation. This would ensure continued spending, tax collection, and borrowing on a temporary basis until a proper budget is passed. Such a scenario would maintain uncertainty but not necessarily trigger a currency crisis.

Lecornu’s minority government faces significant challenges in France’s fractious parliament. Budget battles have already toppled three governments since President Emmanuel Macron lost his majority in the 2024 snap election. Last week, the House narrowly passed the Social Security budget, which included provisions to suspend a deeply unpopular 2023 pension reform.

France, as the eurozone’s second-largest economy, carries substantial weight in currency markets. Signals of weaker-than-expected fiscal consolidation can pressure the euro against the dollar through higher borrowing costs and broader risks in the eurozone. However, the market response depends heavily on whether political tensions escalate into a full-blown crisis.

For now, EUR USD traders are playing a waiting game. The joint committee meeting on Friday and the vote on December 23 will provide crucial clarity. Until then, the currency pair seems content to trade within its narrow range, reflecting cautious optimism that French lawmakers will ultimately find common ground.

Written By Fazal Ul Vahab C H

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